Refinancing a mortgage allows a borrower to renegotiate the conditions of a home loan. Mortgage interest levels swing upward or fall depending upon the fiscal climate in general and on the interest rate banks pay when they borrow. Banks operating in a strong financial climate might loosen lending restrictions and offer prime loans to borrowers who have higher debt ratios or poor credit. During economic downturns, banks tighten lending standards.
Reduced Interest Rates
Reduced interest payments interpret to lower monthly premiums, generally resulting in savings to the borrower. When interest rates fall, a homeowner might have the ability to refinance the home loan at a lower rate. Monthly payment for a $200,000 loan with an interest rate of 6 percent is $1,199. Monthly payment for the same loan at 5% is $1,136. Greater interest rate discounts yield higher savings. Improved credit scores also can lower the interest rate offered on financing.
Homeowners may reap when they refinance a variable-rate mortgage and exchange it for a fixed-rate loan. The security of a fixed-rate mortgage protects a borrower from rate rises later on. Shortening the term of the mortgage from 30 years to 15 reduces the amount a borrower pays for interest. A homeowner with a 30-year loan for $200,000 at 6 percent pays $231,640 in interest over the duration of the loan. The identical loan paid over a 15-year term costs the homeowner $94,120. A homeowner may benefit from refinancing a loan when he eliminates private mortgage insurance, or PMI. Some lenders hesitate to eliminate PMI from existing mortgages even when homeowners repay the debt beyond the normal 80 percent loan-to-value brink –that the amount owed divided by the home's market value. Refinancing starts the process anew, and all variables are negotiable.
Money and Consolidation
When housing markets rise, an owner mechanically builds equity in her home. Equity–the value of the home in excess of the amount owed–provides owners options when they refinance. Banks typically fund up to 80 percent of a home's value. A homeowner might only need financing equivalent to 50 percent of their present market value of their house. The bank may disperse the remaining 30 percent of the amount to the homeowner in cash. A borrower may also mix first and second mortgages into a single loan in the event the complete loan-to-value ratio stays under 80 percent. When home values fall, a homeowner might not even have 20 percent equity in the home. To complete the refinance transaction, a homeowner must actually put cash into the deal–this is referred to as a cash-in trade.